What You Need To Know About The SECURE Act
By Mike Gibbons, RICP®
On the whole, Americans are woefully unprepared for retirement. (1) While wages are not increasing as quickly as the cost of living, many savers are unable to put away as much as they’d like and potentially face a lower standard of living in retirement. Policy-makers and employers have recognized this savings gap and have now taken the first step to help retirees manage their money as well as allow for pre-retirees to plan ahead.
Back in May 2019, the House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This was passed with bipartisan support by a count of 417-3. On December 20, 2019, President Trump signed the bill into law, making it easier for retirees to have a reliable stream of income that lasts through retirement—exciting news for the many Americans who are concerned about stretching their retirement dollars.
While the SECURE Act bill proposes over 20 changes, here are 6 major changes that could potentially impact you if you have an IRA or 401(k).
1. More Annuity Options
Annuities are a type of insurance that guarantees a monthly income in retirement. They’re usually part of pension plans. Annuities aren’t popular 401(k) options because the employer can be sued if the insurance company goes out of business or fails to pay a claim.
Under the SECURE Act bill, the liability would be removed from the employer. This means more employers could offer annuities to their employees without having to worry about being held liable for unpaid claims. The benefit to you is that you get more options to diversify your retirement income through different types of investments.
2. No More Contribution Age Caps On IRAs
Under the current law, a plan participant can’t contribute to an IRA account past the age of 70½ (a major deterrent for those who are still working later in life). (2) Under the SECURE Act, this age cap would be removed.
3. Required Minimum Distribution (RMD) Age Raised To 72
Currently, people who have money in 401(k)s or other tax-deferred plans must start making required minimum distributions (RMDs) at age 70½, even if they’re still in the workforce. (3)
Under the SECURE Act bill, the new mandatory withdrawal age would be 72. This is helpful for those who are still working or are trying to stretch their savings out for a longer retirement.
4. Additional Exception To The IRA 10% Penalty Added
The new law would require employers to list a participant’s projected monthly retirement income on their 401(k) statements. This projected monthly income would be based on their current account balance and would give plan participants time to adjust their savings rate and better prepare for retirement.
The bill would also allow new parents to make a penalty-free withdrawal of up to $5,000 from their retirement account within the first year of their child’s birth or adoption. This money could then be used to cover child-related expenses.
Under the SECURE Act, long-term, part-time workers would be able to finally take part in 401(k) plans. This is great news for women who disproportionately take on part-time work to care for children and aging parents.
5. Lifetime-Income Provision
There’s plenty of advice on how to accumulate wealth using your 401(k), but no one really talks about how to manage your wealth once you retire. The new lifetime-income provision, coupled with annuities, would ensure retirees don’t outlive their money.
If your employer doesn’t offer annuities, the bill would allow you to roll your accounts over to an IRA so you could continue contributing to your retirement.
6. Changes To Inherited Retirement Accounts
Under the current law, inherited retirement account distributions can be spread out over the recipient’s lifetime. Under the SECURE Act, a beneficiary would be required to withdraw the money—and pay taxes on it—within a 10-year period.
This doesn’t affect those who inherit smaller accounts. But for those who inherit larger accounts, taxes will have to be paid over a shorter amount of time, which means a higher tax bill. And, for those who inherit an account in their prime-earning years, their tax burden will increase even more, decreasing the value of the account. Surviving spouses and minor children are exempt from this rule.
How Should You Respond To These Changes?
If you’re concerned about how the SECURE Act will affect your path to retirement, now is a good time to meet with a financial professional to review your retirement plan and check to see if any updates should be made in light of these legislative changes.
At Gibbons Financial Group, we work with you to tailor plans that ensure sustainability of your assets so you can live out your retirement the way you choose while passing those assets on to your family without worry. To learn more about the SECURE Act and how it affects your retirement savings, call us at 224-419-5550 or email me at Mike@gibbonsfinancialgroup.com to schedule a complimentary consultation. And be sure to join our free webinar, Retiring Early From Pharma, created specifically for professionals retiring from the pharmaceutical, biotechnology, and healthcare industries.
About Mike
Michael J. Gibbons is founder and president of Gibbons Financial Group, an independent advisory firm providing custom-tailored financial planning and investment management services to pharmaceutical and healthcare professionals and their families. Mike has over 25 years of experience and spends a significant portion of his day working with pre-retirees and retirees, focusing on asset management, Social Security and pension planning, as well as retirement income preparation. Under the RIA, Mike helps manage approximately $150 million in assets under management and works with clients that meet a minimum investment criterion.
Mike has degrees in both business and psychology from Lake Forest College and currently holds his Retirement Income Certified Professional (RICP®) designation from the American College. Mike was named a Five Star Wealth Manager for 2015-2019* Mike is heavily involved in his community, having served on the Village of Gurnee Police Pension Board as a Community Volunteer and the St. Patrick’s Parish Financial Board. When he’s not working or volunteering, Mike loves playing golf and spending his time with his wife and children. To learn more about Mike and how he can help you, connect with him on LinkedIn, visit his website, and register for his free webinar, Retiring Early From Pharma, created specifically for professionals retiring from the pharmaceutical, biotechnology, and healthcare industries.
*As reported by Financial Planning Magazine, June 1996-2015, based on total revenue. Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management, among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2015 Five Star Wealth Managers.
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(1) https://thehill.com/policy/finance/457447-report-americans-unprepared-for-retirement
(3) https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions